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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast 

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visit on finance.org. 
In March this year, Fortune 

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magazine announced that Elon 
Musk was no longer the world's 

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richest person after being 
overtaken by Bernard Arnaud, the

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founder of luxury goods 
conglomerate LVMHA. 

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Sign of how big the market for 
luxury goods had become, Elon 

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has since retaken his position 
at the top of the list, but is 

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just barely ahead. 
LVMH is a family controlled 

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luxury goods conglomerate. 
Built through acquisition since 

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the 1990s, it was the first 
European company to cross the 

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half a trillion dollar market 
valuation threshold and is the 

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only European company to be 
ranked among the top ten biggest

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global companies. 
The personal luxury goods market

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has seen amazing growth over the
last 25 years. 

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Financial crises, A pandemic, 
geopolitical problems, inflation

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and a squeeze on the cost of 
living have done absolutely 

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nothing to slow the rise of the 
luxury sector. 

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It posted a record year in 2022 
where sales of personal luxury 

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goods hit $385 billion, only 
outdone within the luxury 

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segment by high end cars. 
The luxury goods market has 

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grown in terms of categories 
too. 

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In recent years, luxury was once
made-up of things like clothing,

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jewelry, wines and cars. 
But in recent decades there's 

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been huge demand for high end 
kitchenware, limited edition 

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trainers, and things like makeup
and candles. 

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The definition of luxury goods 
is of course somewhat vague, but

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it usually describes objects 
that not only have a very high 

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price, but that promise quality,
craftsmanship and an air of 

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exclusivity. 
Luxury goods shouldn't be 

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something everyone has, but more
and more people of different 

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ages and income brackets are 
getting caught up in the world 

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of high end goods, driving the 
industry to an incredible boom. 

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After a contraction as the world
locked down in early 2020, the 

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luxury goods sector took off in 
a big way in 2021 as shoppers, 

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flush with savings, government 
checks, investment and crypto 

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gains, indulge themselves buying
cars, jewelry, clothing, 

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watches, handbags and more. 
I remember being quite surprised

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when stores reopened a few years
ago, seeing the long lines of 

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people waiting to be served 
outside luxury goods stores. 

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The stores seemed almost 
overwhelmed by the level of 

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business. 
The luxury sector's momentum 

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kept going into the first 
quarter of 2023, achieving 9 to 

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11% growth over the prior year, 
according to Bain and Company. 

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But there have been some recent 
signs of weakness. 

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Prices for luxury Swiss watches 
on the secondary market, as 

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tracked by the Bloomberg Subdial
Watch Index, are near the lowest

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level seen in almost two years. 
Prices of luxury watches peaked 

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in February 2022 following an 
unprecedented surge in demand 

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during the pandemic. 
Switzerland's Richmond, owner of

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Cartier and Van Cleef and Arpels
fell more than 10% on Monday 

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this week after reporting 
slightly lower than expected 

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first quarter sales. 
Greismont's overall sales grew 

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19% at constant exchange rates, 
just below analyst expectations.

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But sales in the Americas, 
driven mostly by US customers, 

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the luxury sector's biggest 
market by sales, turned negative

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compared with the same period 
last year. 

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Status symbol SUV's like the AM 
GG63 were trading at $100,000 

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premiums over sticker price in 
late 2021. 

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Today, higher interest rates, 
higher fuel prices, and tighter 

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economic conditions overall mean
that the high end SUV premium 

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has mostly disappeared. 
So is the luxury goods bubble 

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bursting or will the boom in 
high end goods keep on going? 

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Now, you might think that the 
growth of the luxury goods 

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market is simply due to growing 
inequality. 

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It seems obvious that these 
goods are made for wealthy 

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consumers, and if the rich are 
getting richer, they should have

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more money to spend on high 
ticket items. 

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It might surprise you that a 
significant portion of the 

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growth in the luxury goods 
sector comes from middle and low

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income shoppers. 
Americans with a household 

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income of less than $50,000 make
up about 27% of regular luxury 

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good consumers, according to 
global data, which is almost as 

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big a group as shoppers in the 
bracket up from them with 

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incomes of up to $150,000 a 
year. 

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While Americans of all income 
groups were buying more luxury 

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apparel during the pandemic, 
purchases by individuals making 

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$40,000 a year or less rose the 
most. 

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They were 365% higher at the end
of 2021 than they were in 

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January 2020, before lockdown 
began. 

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In the United States, the luxury
goods business has been booming 

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not only because there have been
more people buying luxury goods 

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in recent years. 
But also because the average 

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price of luxury items has risen 
fast too, having spiked 25% 

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since 2019, according to the 
ecommerce analytics company Data

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Weave, Luxury accessories on the
online retailer Farfetch rose by

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almost 39% between February 2020
and May 2021. 

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The luxury goods economy has 
changed in other ways over the 

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last decade, too. 
And the explosion of online 

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luxury resale platforms means 
that there's now an active 

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secondary market in luxury 
goods, which were historically 

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bought by people who had no 
intention of ever selling them. 

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When people could see 
discontinued luxury items, 

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sometimes rising in price, they 
began to think of their spending

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as investment rather than as 
consumption. 

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The new group of buyers were 
buying watches and handbags and 

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even trainers to store them 
rather than to wear and use 

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them. 
You have to wonder how 

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collectible these items will 
actually be in the future when 

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there are so many of them being 
maintained in perfect condition 

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rather than being used and worn 
out over time. 

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The assumption is that the items
that are most fashionable today 

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will still be in fashion in the 
future when the investors decide

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to sell. 
The luxury economy of today has 

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become part of youth Internet 
culture too, where people are 

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trying to figure out new trends 
through online research. 

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They then buy the goods online 
and sell old pieces online too. 

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Luxury goods have become a sort 
of a language through which 

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people communicate taste and 
connoisseurship on digital 

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platforms, and brands are well 
aware of this. 

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Their marketing is very focused 
on social media and Internet 

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culture. 
A friend of mine who used to 

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sell luxury watches tells me 
that Instagramers were a big 

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part of the customer base. 
They had to have whatever the 

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hottest new product was in order
to stay relevant online. 

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The average age of luxury 
consumers has been falling too. 

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According to a 2022 report from 
The Real Real, an online and 

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brick and mortar consignment 
marketplace for used luxury 

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goods, millennials buy and sell 
more goods on their platform 

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than any other generational 
cohort. 

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And together with Gen. 
Z, they make up 41% of the 

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luxury goods sites, more than 28
million members, according to 

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Bain and Company Research. 
Members of Gen. 

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ZA cohort between the ages of 11
and 26 are making their first 

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luxury purchases at around the 
age of 15, which is younger than

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millennials did. 
And the same research projects 

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that millennials and younger 
generations will make up 80% of 

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luxury spending by 20-30. 
This might seem to make little 

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sense to older generations, 
given the countless reports of 

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young people's finances lagging 
behind those of prior 

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generations at the same age 
point. 

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But a report from Morgan Stanley
argues that this group has more 

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disposable income at a young age
because they're living with 

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their parents longer due to high
rental prices. 

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If the money doesn't go on rent,
it goes on something else. 

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This age group are also 
comparing themselves to much 

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wealthier people than their 
parents generation would have in

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the past, as platforms like 
Instagram and YouTube. 

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Give them a look into the lives 
of wealthy celebrities, or even 

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people who pretend to be 
wealthy. 

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Online influencers are often 
given expensive items for free 

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or are paid to promote them. 
If you've been feeling an 

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unexplainable urge to buy 110 
year old camera, it's probably 

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because you've been watching my 
videos too often on top of all 

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of this. 
The availability of Buy now, Pay

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Later platforms makes it easier 
for young people to finance an 

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expensive purchase, which would 
have been impossible for prior 

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generations. 
Buying a home might feel too out

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of reach to even dream of, but 
buying a watch or a handbag in 

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installments that's sure to go 
up in value and will impress all

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of your followers on Instagram 
is much more doable. 

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As counterintuitive as it may 
seem that people without 

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significant wealth would borrow 
to spend on luxury goods, a 2016

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paper from the Federal Reserve 
Bank of Philadelphia found that 

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higher income inequality 
heightens awareness and anxiety 

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about social class. 
And this class anxiety fuels 

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consumption to make things worse
for those who spend to impress. 

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As luxury goods have become more
widely owned, the wealth signal 

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that they send has become 
increasingly diluted. 

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People destroy their finances to
buy goods, hoping to impress 

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people, and no one really 
notices. 

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The term Veblen goods is used by
economists to describe goods 

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whose demand increases as their 
prices rise, resulting in an 

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upward sloping demand curve 
instead of the more typical 

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downward sloping demand curve. 
The idea was first explained by 

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Thorsten Veblen in 1899 in his 
book The Theory of the Leisure 

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Class. 
He put forth that certain 

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expensive goods aren't purchased
in spite of their high price, 

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but because of their high price.
Veblen introduced the idea of 

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conspicuous consumption, or that
people specifically buy goods as

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data symbols. 
To cultivate this desire, the 

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luxury industry limits the 
availability of certain 

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products, but they want to 
capture as much of the market as

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possible. 
So increase their offering of 

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accessible items while pushing 
up the prices of their top shelf

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offerings to instill a sense of 
exclusivity. 

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This can be a difficult 
balancing act, and it sometimes 

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goes wrong. 
In the early 2000s, Burberry 

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sold too many affordable items 
in the UK and this, combined 

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with widely available 
counterfeit goods, meant that 

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the brand became associated with
Chav culture and became viewed 

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as bad taste. 
After a change of CEO in 2006, 

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they managed to turn the brand 
around again. 

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Chanel recently faced pushback 
from customers. 

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After raising the prices on some
of its handbags by more than 70%

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since 2019, they defended this 
price hike by saying that the 

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cost of materials had gone up. 
Louis Vuitton can't make the 

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same argument as their bags are 
mostly made of plastic, but I'm 

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told that it's the highest 
quality artisanal French 

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plastic. 
According to Bain and Company, 

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70% of sales growth in luxury 
leather goods last year was 

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explained by price increases, 
with only a small percentage 

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being explained by increased 
sales volume. 

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Bernard Arnos growing wealth has
attracted criticism in France as

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evidence of growing inequality. 
But he argues back that luxury 

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goods companies are key to both 
the French economy and the 

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European economy, as these 
companies are big employers, big

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taxpayers, big exporters and 
drivers of economic growth in 

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the region. 
People have said that it's a 

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disgrace for France that all of 
these big luxury groups produce 

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useless things, so we should get
rid of them, Arno said. 

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But how many people do we employ
in France? 

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Luxury employees, a million 
people. 

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He went on to claim we paid the 
most taxes of any company in 

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France. 
LVMH announced their earnings 

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next week and it will be 
interesting to see how things 

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are going. 
On their last earnings call, 

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they reported a 17% jump in 
sales thanks to a rebound in 

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China following the end of 
lockdowns. 

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The Chinese economy now appears 
to be stalling with the dollar 

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value of China's exports having 
fallen by more than 12% in June 

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and property sales are down 27% 
compared with a year earlier. 

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US revenue for LVMH grew at 8% 
in the first quarter, but the 

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CFO said that most of that was 
down to a brisk business at it's

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less exclusive Sephora beauty 
chain. 

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For the rest, the business is 
slowing down a bit, he said, 

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citing softer demand for 
jewelry, fashion, leather goods 

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where sales to US shoppers both 
at home and abroad were 

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flattish. 
We have to wonder if what's 

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happening in the auto industry 
tells us anything about the 

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00:14:57,380 --> 00:15:01,020
luxury goods industry, where 
dealers are struggling to sell 

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luxury used cars priced at over 
$40,000. 

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While bread and butter cars 
under $25,000 are seeing plenty 

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of demand, credit card data from
Barclays and Bank of America 

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show that Americans dialed back 
spending in June as fewer people

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splashed out on high end goods. 
Younger shoppers who drew on 

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savings during lockdowns are now
under more pressure from rising 

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00:15:28,490 --> 00:15:32,850
prices than older generations 
with higher incomes, according 

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to Citibank. 
Millions of Americans face ahead

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00:15:36,320 --> 00:15:40,760
of at least $500 a month to 
their household budgets from the

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00:15:40,760 --> 00:15:45,120
restart of federal student loan 
payments in September, according

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to a new study by TransUnion. 
This resumption of loan payments

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00:15:50,400 --> 00:15:54,160
will hit the young consumers who
have been key to the growth of 

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the luxury goods sector in 
recent years, Swatch Group, 

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00:15:58,280 --> 00:16:01,360
which owns a number of the 
biggest luxury watch brands, 

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including Omega and Brigade. 
Reported good earnings recently,

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00:16:06,190 --> 00:16:09,510
but said that growth was 
strongest in the lowest price 

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segment of watches and jewelry. 
Demand for the company's popular

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Moon Swatch, priced at around 
$260, has accelerated, according

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00:16:19,230 --> 00:16:22,790
to the company. 
We've seen luxury watch prices 

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00:16:22,790 --> 00:16:26,030
on the second hand market 
falling and watches that were 

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00:16:26,030 --> 00:16:30,070
impossible to buy new a year ago
are now starting to become 

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00:16:30,070 --> 00:16:32,510
available. 
The Rolex craze isn't going 

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00:16:32,510 --> 00:16:33,630
down. 
It's still very hard to get a 

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00:16:33,630 --> 00:16:36,110
Rolex, but people that have been
on the list for a year, two 

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00:16:36,110 --> 00:16:37,470
years, three years, they're 
getting the call. 

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00:16:37,550 --> 00:16:39,990
Yeah, you know, but. 
But that being said, can you 

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walk in and get a dessert? 
Can get a hard to get one? 

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00:16:42,350 --> 00:16:44,670
Probably not. 
There are lots of reasons for 

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why watch prices are falling 
faster than luxury spending in 

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00:16:48,230 --> 00:16:50,950
general. 
It's partially the slowdown in 

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00:16:50,950 --> 00:16:54,230
China, where a lot of people 
sold their watches in the last 

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00:16:54,230 --> 00:16:57,910
year or two to fund spending 
during the lockdown period. 

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00:16:58,240 --> 00:17:02,400
It's also the crypto sell off. 
Coin Bros are no longer buying 

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00:17:02,440 --> 00:17:05,079
iced out watches and high spec 
Corollas. 

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00:17:05,400 --> 00:17:08,839
There's also some price 
distortion in the market coming 

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00:17:08,839 --> 00:17:13,280
from Rolex's December launch of 
an official resale channel. 

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00:17:13,599 --> 00:17:19,079
Rolex watches make up 42% of the
global luxury used watch sales 

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00:17:19,079 --> 00:17:23,839
market by value, and Rolex 
official certification is worth 

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00:17:23,920 --> 00:17:27,560
a 39% premium according to watch
charts. 

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00:17:28,099 --> 00:17:33,100
As the CFO of LVMH said on the 
earnings call in April, maybe 

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00:17:33,100 --> 00:17:36,860
interest rate rises are taking 
their toll on spending. 

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00:17:37,340 --> 00:17:39,900
So are luxury goods a good 
investment? 

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00:17:39,900 --> 00:17:43,300
Should you buy designer goods 
and hope that they'll appreciate

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00:17:43,540 --> 00:17:47,140
as part of your retirement plan?
Well, based on the returns 

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00:17:47,140 --> 00:17:51,260
calculated by Knight Frank over 
the last 10 years, the only 

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00:17:51,260 --> 00:17:55,300
luxury investment that has 
outperformed the S&P 500 has 

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00:17:55,300 --> 00:17:59,330
been rare whiskey bottles. 
The rest of all underperformed, 

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00:17:59,530 --> 00:18:03,130
and that's before taking into 
account storage costs, insurance

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00:18:03,130 --> 00:18:05,890
costs, transaction costs, and so
on. 

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00:18:06,330 --> 00:18:09,730
The last decade has also been a 
very good period for 

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00:18:09,730 --> 00:18:13,370
collectibles, with interest 
rates near 0 for most of the 

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00:18:13,370 --> 00:18:16,690
time. 
In 2018, Dimson, Marsh and 

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00:18:16,690 --> 00:18:20,690
Staunton of the London Business 
School constructed a time series

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00:18:20,690 --> 00:18:25,250
of 118 years of investment 
performance of wine stamps, 

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00:18:25,250 --> 00:18:28,840
violins, art. 
Collectible books, jewelry, and 

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00:18:28,840 --> 00:18:33,080
classic cars and compared them 
to the returns of global 

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00:18:33,080 --> 00:18:36,880
equities over that period. 
Classic cars were the best 

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00:18:36,880 --> 00:18:41,120
performing collectible asset, 
followed by jewelry, books, fine

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00:18:41,120 --> 00:18:44,720
art, violin, stamps, and then 
fine wine. 

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00:18:45,040 --> 00:18:48,320
But all of these assets 
underperformed the stock market 

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00:18:48,320 --> 00:18:53,500
over the 118 year time frame. 
When you take transaction costs 

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00:18:53,500 --> 00:18:57,220
and storage costs into account, 
the returns of most of these 

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00:18:57,220 --> 00:19:01,660
assets were entirely wiped out. 
So it might only make sense to 

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00:19:01,660 --> 00:19:05,820
buy these items if you enjoy 
owning and using them, but not 

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00:19:05,820 --> 00:19:08,900
as an investment. 
Thanks for tuning into today's 

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00:19:08,900 --> 00:19:11,180
podcast. 
If you enjoyed it, send a link 

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help the podcast to grow. 

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Have a great day and talk to you
next week. 

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00:19:16,860 --> 00:19:20,020
Bye. 
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